We audited the BOP’s management of construction contracts in effect as of December 2001 and determined that, in general, contract management had improved since our 1998 audit. Specifically, the BOP has strengthened controls over contract modifications, quality control, and progress payments to contractors. However, of the 31 contract modifications reviewed, we identified a $1.6 million proposed contract modification at the Victorville USP that, in our judgment, is unwarranted. We also noted three modifications that exceeded the Independent Government Estimates by $306,679 without required justification. Similar exceptions were reported in our 1998 audit report.

CONTRACT MODIFICATIONS

A contract modification can increase the cost or length of a project, or both and it can either be initiated by the BOP or at the request of the contractor. The BOP may initiate contract modifications to change the scope of work that results from new regulations, policy decisions, or changes in technology. Similarly, the contractor may request a change due to unforeseen building conditions or circumstances that could not be reasonably anticipated when the contract was awarded. BOP Construction Management Guidelines require that all contract modifications be evaluated and approved by the Supervisory Construction Representative at the construction site and by BOP management in its Central Office.7 If approved, the modification is forwarded to the Contracting Officer for final approval. The Contracting Officer is the only individual with authority to modify the contract. The sections that follow discuss our review of contract cost modifications and contract time
modifications.

Cost Modifications

A contract modification can have a significant effect on the final cost of a prison construction contract. Therefore, it is important that the BOP approve only modifications that are necessary and reasonably priced. The BOP Central Office reviews requested modifications to determine if they are necessary. In addition, BOP staff on-site ensures that the price of a modification is fair and reasonable by obtaining an Independent Government Estimate (IGE). An IGE, an estimate usually prepared by a construction management firm, is used by the BOP to negotiate a fair and reasonable price for a contract modification.8 FAR Subpart 4.803(a)(2) requires that the contract file contain all justifications and approvals. In our judgment, this requirement includes the justification for negotiating a modification price above an IGE.

For the four projects we reviewed, the BOP issued a total of 68 modifications: 43 that increased the cost of the contracts by $9.9 million, 3 that decreased the cost of the contracts by $203,436, and 22 that had no dollar effect.9 The net effect of the increases and decreases in costs resulting from the modifications was $9.7 million as shown in the following table.

We examined 31 of the 43 modifications that increased the cost of the contract. Our sample represented 84 percent of the increased costs. We found that six modifications were not adequately supported in accordance with FAR. Specifically, three modifications exceeded the IGE without justification and four, including two that also exceeded the IGE, lacked adequate documentation showing why the modification was necessary. Finally, we identified a $1.6 million proposed modification that, in our judgment, is unnecessary. As a result, we are questioning the amount that exceeded the IGEs and recommending that the BOP not approve the proposed modification. We are not questioning the inadequately documented modifications because BOP officials’ explanations for why they were necessary appeared reasonable. These modifications are discussed in more detail below.

Modifications in Excess of IGEs - At the USP Victorville and USP Coleman projects, the total costs for three contract modifications were not reasonable, in our judgment, because the negotiated price exceeded the IGEs by a total of $306,679 without written justification by the Contracting Officer as required by FAR. Specifically:

At the USP Victorville, a $2,035,000 contract modification to add security enhancements and install additional closed-circuit televisions was $259,191 above two IGEs. In addition, at the USP Coleman, a $136,154 contract modification to change landscaping features in the interior of the facility was $17,254 above the IGE.
BOP officials did not provide an explanation as to why they paid $276,445 more than the IGEs for these contract modifications.

At the USP Coleman, a $279,097 contract modification to provide a sealant finish to the exterior and
interior walls of the prison and install fiber optic cabling was issued for $30,234 above two IGEs. According to
BOP officials, the IGEs were understated. However, the contract files contained no supporting documentation to
substantiate their assertions.

Unwarranted Modification - At USP Victorville, the BOP was considering issuing a $1.6 million contract modification that, in our judgment, is unwarranted. If approved, this proposed modification would unnecessarily increase the cost of the project.

Specifically, BOP officials stated that in an effort to facilitate the construction of this prison, they provided all bidders with design documents for which the BOP had paid an architect $2.5 million. Bidders were expected to take these documents into account in bidding on the design and construction of the prison. In September 2000, the BOP awarded the contract for $102 million, which included $3.7 million for additional design work. However, 1 year after the contract was awarded, the general contractor requested a $2 million modification to remedy what it perceived as design omissions and deficiencies in the original architects’ work.

Officials from the Design and Construction Branch initially rejected the contractor’s request based on the fact that the contractor examined the design documents before submitting a bid. However, they later recommended that the Contracting Officer approve a modification for $1.6 million. According to BOP officials, their rationale for recommending approval was partly to preclude any future claims that the contractor might bring against the BOP. In addition, officials told us that the total amount spent by the BOP for the design of the facility after the modification would not exceed the amount incurred for design work on similar projects. Furthermore, BOP officials
said that the situation at Victorville occurred because they were transitioning to the design-build contracting method and they were no longer providing design documents to bidders. At the time of our review, the Contracting Officer had not approved the modification.

In our judgment, BOP management should not approve this proposed modification for the following reasons. First, the contractor had previously worked with the architect who prepared the design documents at another USP and should have been familiar with the architect’s work during the solicitation and contract-awarding phase. Second, the contractor’s own cost proposal indicated that the contractor reviewed the design documents before submitting a
bid and noted that no significant adjustments were needed. Finally, recommending approval of a modification to preclude any future claims or because total design costs after the modification will fall within a range of design costs on similar projects are, in our judgment, not valid justifications. Rather, a modification should be based on a determination that the work is necessary and is not covered under the terms of the original contract. We saw no evidence in the contract files that such a determination had been made and, consequently, we recommend that the Contracting Officer not approve the modification.

Inadequately Documented Modifications - At USP Coleman we found that four contract modifications, including the landscaping and sealant modifications discussed above, lacked adequate documentation explaining why
they were considered necessary. However, BOP officials’ reasons for the modifications, as explained to us during our site visit, appeared reasonable. For example, BOP officials stated that the landscaping modification was necessary to enhance security. The original contract specified that areas between housing units be covered with grass. The warden was concerned that prisoner maintenance of these areas would have required additional security because they were not easily visible from guard towers. Consequently, BOP officials told us they submitted the modification, which called for replacing the grass with gravel, to address the warden’s security concerns.

BOP officials stated there was no BOP policy or procedure requiring written justification for modifications.
Nevertheless, FAR Subpart 4.803(a)(2) states that the contract file should contain justifications and approvals.
In our judgment, the reasons why modifications are needed should be documented to strengthen internal controls and help ensure that only necessary modifications are approved.

Time Modifications

BOP construction contracts specify a completion date that the general contractor is expected to meet. However, extensions to the due date can be approved through a contract modification for reasons such as labor strikes, inclement weather, and BOP directed changes in the scope of the work. Before awarding a time extension, the construction management firm is required to analyze each request to determine the effect it has on the work schedule, known as the critical path.11 Because a change to the critical path affects the completion date of the project, it is important that time-related modifications be properly justified and evaluated to ensure that only warranted modifications are approved.

At three of the four projects visited, we reviewed seven time extension modifications. Our review revealed that
these modifications were supported and properly approved. In addition, the changes made had a minimal impact on the completion dates for each of the three projects, adding between 22 to 47 days to the overall completion date, or an increase of 2.9 to 5 percent. The remaining project reviewed was completed 60 days ahead of schedule.

CONTRACTOR TIMELINESS

According to the BOP, its facilities are dangerously overcrowded at 33 percent above rated capacity nationwide. Moreover, high security facilities are overcrowded by 51 percent. Consequently, the timely completion of prison construction projects is critically important to help reduce prison overcrowding in the federal prison system.

To determine if any of the 13 ongoing projects were experiencing significant delays, we compared the amount of time that had elapsed to the percentage of work that had been completed. While this is not a definitive measure of timeliness, in our judgment, it can provide a reasonable indication as to whether a project is experiencing delays or has the potential to be delayed.

Our comparison did not find significant delays in 12 of the 13 projects. The USP Canaan project, however, was at
least 1-year behind schedule. According to BOP officials, the delay was caused, in part, when local citizen groups
voiced concerns, not previously raised by local public officials, that the project could damage historic structures on the site. The local groups appealed to the Pennsylvania State Historic Preservation Office (SHPO) to ensure that the BOP complied with the National Historic Preservation Act. As a result, the SHPO required the BOP to perform a study of the potential impact its construction activity would have on these structures. Construction was also delayed because of disagreement between the BOP and the U.S. Army Corps of Engineers (Corps) over a wetlands permit under the Clean Water Act. The Corps wanted to designate a larger section of the construction site as a wetlands area than what the BOP was willing to give up, based on its interpretation of the regulations.

Based on our review of the project files, the BOP made a determined effort to come to an agreement with SHPO and the Corps. The BOP conducted the study for SHPO and entered into a Memorandum of Agreement on steps it would take to protect the historic structures. The files also showed that the BOP met regularly with officials from the Corps and ultimately the wetlands disagreement was resolved. BOP officials estimated that the delay increased the cost of the project by $5-10 million. They stated that the problems encountered for this project were not typical of past experiences on construction projects.

BOP QUALITY ASSURANCE OF CONSTRUCTION PROJECTS

The FAR, Part 46 requires that the BOP institute a quality assurance program. The need for a quality assurance program is especially important on firm-fixed-price contracts—the type of contract the BOP awards to construct prisons. Under such contracts, the general contractor is paid a fixed amount to design and build a prison within a specified period of time. The contractor’s anticipated profit margin at the start of the contract can be reduced by higher than expected costs or penalties assessed for untimely completion. Thus, a contractor could have an incentive to reduce its costs by eliminating required work or using inferior materials. Without an adequate quality assurance
program, the BOP may have projects that are built on time and within cost, but lack the necessary quality to ensure a safe and secure facility.

The BOP is responsible for the overall quality program and has final say in corrective actions. The BOP’s quality program begins before contracts are awarded when the BOP ensures that it selects only qualified contractors. After contractors are selected and construction is in progress, the BOP relies on management firms to oversee the contractors’ daily operations. In addition, general contractors are required to have their own quality programs.

Contractor Integrity - Before awarding a contract, the BOP is required by the FAR to determine whether the prospective contractor is qualified to receive the contract. This includes determining whether the contractor has been debarred from doing business with the federal government. BOP officials told us they check the debarment list12 to verify that the prospective contractor has not been debarred. At the four locations visited, we verified that the contractors were not on the list.

Because the construction management firm is closely involved in performing inspections and observations of material and work being performed by the general contractor and its subcontractors, it is important that the firm be independent. Therefore, the BOP requires the management firm to provide a certificate attesting to its organizational independence from the general contractor. At each of the four projects visited, we verified that the firm provided the certificate to the BOP.

Inspection Process - Each project has a quality team consisting of BOP and the construction management firm personnel, who observe the work of the general contractor to ensure it conforms to contract requirements. At the four locations reviewed, we verified that inspections were being conducted by examining daily inspection records and other relevant reports. In addition, we interviewed inspectors to determine how they performed the inspections and what they looked for. Furthermore, we observed the process for documenting and resolving exceptions.

To perform their functions, the quality team must be familiar with the contract documents and requirements, the construction drawings, time schedules, the BOP Technical Design Guidelines, and applicable building codes. If staff from either the BOP or the construction management firm identifies contractor non-conformance in material or workmanship, one of two reports are prepared to notify the general contractor and track corrective action.
One report, the Field Observation Report, is used to inform the general contractor of minor non-conformance or other observations. The other report, the Deficiencies and Omissions Report, is prepared for more serious issues when the work was performed incorrectly or omitted. The BOP provides these reports to the contractor who is expected to take corrective actions. Then the BOP verifies that the corrections are made; uncorrected deficiency reports may result in a monetary penalty.

We reviewed all 214 Field Observation Reports at the four projects visited as well as all 20 Deficiencies and Omissions Reports at USP Coleman to determine whether corrective actions were taken. We found that the general contractors acted on all the problems noted in the reports and the items reported were resolved. BOP officials told us the reason there were no Deficiencies and Omissions Reports issued at USP McCreary County, USP Victorville, and FCI Victorville was because BOP management, at these locations, had been successful in resolving possible non-conformance issues before they warranted the more serious deficiency report.

General Contractors’ Quality Programs - Under the terms of the contract, general contractors are also required to have a quality assurance process, which includes using their own inspectors to review the work. These inspectors prepare reports for all non-conformance issues identified. Before April 2000, the general contractors were not required to share these reports with the BOP. However, the BOP now requires general contractors to provide a list of all deficiencies.

The BOP had received these lists at three of the four locations visited.13 To determine if the BOP was adequately monitoring the contractors’ corrective actions, we reviewed the BOP’s follow up actions. We found that in each instance the BOP followed up on the deficiencies by meeting with the general contractor on a regular basis, reviewing related documents, and physically verifying that
corrective actions had occurred.

REVIEW OF CONTRACTOR PAYMENTS

The FAR Subpart 32.101 authorizes the BOP to make monthly progress payments to its contractors based on the percentage of work completed. To achieve this, the BOP and the general contractor agree to a schedule of tasks that need to be performed and their value. At the conclusion of each month, the contractor submits a payment request that identifies the materials delivered and the percentage of work performed for each task.

A single payment can involve millions of dollars. Therefore, it is important that the BOP adequately review the contractors’ payment requests to ensure that work is billed accurately, reflects the materials used, and the work has been performed. In addition, when processing these payment requests, the BOP is required to adhere to the FAR Subpart 32.9. According to the FAR, if the BOP makes a late payment, it is required to pay interest to the contractor.

Accuracy of Payments – Upon receipt of the contractor’s payment request, the BOP’s procedure is to compare, with the assistance of the construction management firm, the percentage of work the general contractor claims to have completed to the actual work performed. If discrepancies are identified, the BOP meets with the general contractor to discuss and negotiate revisions to the percentage claimed. Once the differences are resolved, the contractor submits a revised payment request incorporating the negotiated revisions. The BOP Contracting Officer approves the revised payment request and forwards it to the Central Office for payment.

At three of the four projects visited, we tested the payments made to the general contractors and the construction management firms. To determine if the payments made were accurate and reflected the percentage of completion, we judgmentally selected 58 payments totaling over $110 million from the 91 payments totaling over $154 million that had been made at the time of our audit. We examined the BOP’s and the construction management firms’ review of payment requests and the revisions resulting from the negotiations with the contractors to determine if the revised payment requests were accurate. We found that all payments made were accurate and were reviewed and approved in accordance with the process established by the BOP. At the remaining location, we did not test payment requests, but we identified the internal controls over the payment review and approval process and these controls appeared to be adequate.

Timeliness of Payments – The FAR Subpart 32.904(d) requires the Government to make payments on construction contracts within 14 days of receipt of the billing invoice and within 30 days for all other types of contracts. If the Government makes a late payment, the FAR Subpart 32.907 requires that interest be paid to the contractor.

We tested the 58 sample payments described above to determine whether the BOP was complying with the prompt payment requirements of the FAR. We found that the BOP paid 51 of the invoices on time. Three others were 2 to 31 days late, but interest was paid to the contractor as required. The BOP did not comply with the prompt payment requirements for the remaining four payments as follows:

At USP Victorville, a $5,373,256 payment and a $4,988,369 payment to the general contractor were paid 25 days late and 1 day late, respectively. In addition, at FCI Victorville, a $20,000 payment to the general contractor was paid 14 days late. The BOP did not pay the contractors interest for these late payments.

At USP Coleman, the BOP erroneously paid late interest totaling $614 to the general contractor for a payment that was paid on time.

These errors occurred because the BOP’s Central Office used incorrect dates for the receipt of the billing invoices when they calculated payment due dates. In our judgment, these errors were not significant and resulted from not applying the FAR requirements when calculating payment due dates. We advised the BOP to recoup the $614 overpayment and to pay the appropriate interest for the late payments; they agreed to do so. We also advised the BOP to take steps to ensure that payment due dates are calculated based on the correct invoice receipt dates.

CONCLUSION

In our judgment, the BOP has generally strengthened controls over its management of construction projects since our last audit in 1998. The BOP has a quality assurance program in place and appears to adequately monitor the quality and timeliness of the general contractors’ work. In addition, payments made to contractors were accurate and most were paid on time.

Generally, contract modifications were adequately supported, properly approved, and the amounts were either below the IGE or if not, were adequately justified. However, we identified a $1.6 million proposed modification that in our judgment was unnecessary and three modifications that were negotiated for $306,679 above the IGEs without adequate justification.

RECOMMENDATIONS

We recommend that the BOP Director:

Remedy the $306,679 in questioned costs for contract modifications that exceeded the IGEs.

Ensure that future contract modifications that exceed the IGE are properly justified.

Ensure that the unnecessary $1.6 million proposed modification for additional design and construction work at the USP Victorville project is not approved.

Ensure that future contract modifications have documented reasons for why they are needed.

Remedy the $614 erroneous interest payment and pay interest to the contractor for the three late payments we identified.

Ensure that payment due dates are calculated based on the correct invoice receipt dates.

Footnotes

The officials who are required to approve a modification vary depending on the value of the modification. Modifications up to $50,000 must be approved by the Project Manager and modifications up to $100,000 must be approved by the Project Administrator. Modifications of $100,000 or more, or modifications that extend the length of a contract, must be approved by the Chief of the Design and Construction Branch.

The BOP is required by FAR Subpart 36.203 to obtain and IGE for contract modifications that are anticipated to cost $100,000 or more.

Modifications that have no dollar effect may result from administrative changes such as appointing a new Contracting Officer for the contract.

As of October 18, 2001, for USP Coleman; June 29,2001, for USP McCreary; and December 4, 2001, for USP and FCI Victorville.

For a construction contract, the BOP and the contractor agree up front to a series of
milestone dates for each construction activity to occur. The contractor must meet essential milestones dates and related tasks in order to complete the project on time. These essential dates and tasks are called the Critical Path.

The U.S. General Services Administration maintains the List of Parties Excluded from
Federal Procurement and Nonprocurement Programs.

We did not perform this review at the USP Coleman project because, as discussed earlier, the general contractor was not required to submit such reports to the BOP.